Market Bulletin: Volatility

Dear Clients:

Recessions are usually rear-view mirror events. We often do not know we are in a recession until it is well underway. Sometimes by the time it is apparent that we are in a recession it is over or close to it. That is not the case this time. We are acutely aware at present that the COVID-19 pandemic sweeping the globe has pushed the U.S. economy into recession, with U.S. GDP falling 4.8% in the first quarter. We expect to see negative GDP for the second quarter of 2020, even though markets have begun to recover. It is not uncommon for markets to begin to head higher before a recession ends, as investors take advantage of price declines that have happened for stocks of companies they want to own. In-fact as you can see from the chart below, when looking at all recessions going back to 1950, the market has dropped before the economy does and will also typically recover faster than the economy.

Market volatility continued in April as investors tried to understand the impact the COVID-19 pandemic will have on our economy. When most investors hear “volatility” they think about large drops in the market, however it is important to remember there can be both positive and negative volatility. April was the best single month for stock markets since 1987, with the S&P 500 growing over 30% from the lows we saw in March. Some states, including Texas, have begun the process of allowing businesses to reopen, and the Federal Reserve just last week said they will continue to use everything at their disposal to help the economy through this pandemic. Volatility will continue and we expect to see more large swings both up and down as companies announce their earnings for the first and second quarters, so do not be surprised when these market gyrations occur.

There has never been an economic event quite like this, and because of that we are going to see economic data that we never thought possible, for example, unemployment. Over the last six weeks new unemployment claims have blown past previous records, leaving us with a current unemployment rate of 14.7%. Even so, markets continue to climb because unlike previous recessions these unemployment numbers are considered to be temporary.

Many businesses have had to furlough their employees to keep up with expenses while we have been sheltering in place but eventually doors will open again, and life will continue. In the meantime, the federal stimulus has increased unemployment benefits and many Americans are now getting as much in unemployment as they did when they were working.

Another first for the economy this past month was when oil futures turned negative. With the entire globe on lock down there has been a sharp decrease in demand for oil, while production has not slowed. Saudi Arabia and Russia have agreed to drastic cuts in production to help with the decrease in demand, but some economists see this as too little too late. U.S. oil producers have struggled to cut production fast enough and are running into storage limitations. Many of these producers were willing to pay others to take their oil and store it. This does not immediately affect the economy. It could take some time for supply and demand to level out, but these lower costs should eventually help to stimulate growth as lower energy costs give consumers more money to spend.

Uncertainty is still present in the markets, but one thing remains clear, eventually the economy will recover. I have a great deal of conviction in that statement. I spend my days talking and listening to clients, acquaintances and my own family. The message I hear consistently is that we are all anxious to get out and get back to life as it was before Covid-19 rocked our world. Some aspects of our reality are probably forever changed, nevertheless, we are all ready to book a trip again, buy a car or simply dine out.

Thank you for your continued trust. Please stay safe and have a Happy Mother’s Day.